Key insights from Technology M&A in 2019

Technology M&A activity in 2019

The global technology M&A activity has witnessed a decline in 2019 due to uncertainties in macroeconomic trends including an anticipated economic slowdown and geopolitical concerns including Brexit and US China Trade war. On the other hand, low interest rates and high cash reserves available with lot of major corporations can sustain the record level of M&A that we have seen in recent years. Hence strong support from public and private markets as well as favorable debt markets are driving an active M&A market despite political uncertainties. So founders and management teams have wider options in terms of deal structure and access to capital to drive growth. This is the reason why we see companies continue to stay in Private equity ownership for a longer period with secondary and tertiary buyouts becoming more common.
Taken together these factors are likely to mean that most businesses are hoping for the best while preparing for the worst. Many companies are taking the time to understand the target company asset so that they can build the conviction required to get the deal done in this competitive and highly priced environment. Inspite of the uncertainty, it is clear that technology will play a key role for businesses to stay ahead of their competitors. This would fuel M&A in technology sector.
The Private equity companies are determined to invest in technology companies and events like Brexit can create unique opportunities for them to deploy their capital. Private equity companies are looking at more carve out deals which are complex and harder to execute in the hope that there will be less competition for the assets which inturn will provide a more achievable price tag.
Corporates are looking to divest their businesses which are not core to their strategy and Private equity companies that are pursuing a buy and build approach to deploy capital are eager to buy these divested assets. US companies are also looking to invest in UK firms that have a global presence to take advantage of the weaker pound that would allow them to buy assets at attractive valuations.

Key Digital Themes driving Technology M&A

Data and Data analytics is the key driver of M&A in technology sector. This is because the human element of the business processes has changed, there is a significant volume of deals involving the business models enabled by technology like SaaS product delivery and API interfacing. Technologies like AI and Blockchain are driving smaller acquisitions. Strategic investments are made by companies in these technologies to justify a business case how a disruptive technology would impact their business.
Acquirers look for target companies that display a significant growth potential, predictable and recurring revenues and have a strategic fit with the acquirer. The strength of customer relationships is a primary driver of M&A across a range of business models and sectors. This is because there is an increasing focus on recurring revenue models from both strategic acquirers and financial investors. To build a strong customer relationships, target companies needs to have a quality product that should demonstrate high level of customer satisfaction.
This does not mean that only high performing businesses are hot assets. At the right price when the change of ownership can unlock value by either providing effective leadership support or by injecting additional capital to fund projects, then the acquirer would be interested to close such deals. Target companies who have built a team their business will need in the future rather than a team that is simply ‘fit for purpose’ now will be more in demand from the buyers.

Success post acquisition

Key rationale for acquisition from a buyer perspective would be acquiring specific technology that will enable the buyer to capitalize on a particular opportunity, adding a set of new customers which the buyer can cross sell the services to and gaining synergies by combining businesses in a way that enables process rationalization to achieve costs savings. The buyer needs to assess how well the target company has integrated into their platform to determine whether the full potential of the combined business has been realized.
The acquirer needs to assess whether there are barriers to integration in the due diligence phase prior to the signing of the deal, identify key licenses and material contracts that will be affected by the deal and if any employee or third party consent is needed to be obtained before closing of the deal. The buyer needs to confirm if any transitional arrangements with the seller is needed to bridge the integration gap. This is especially relevant in the case of Carve-outs transactions. In case of an issue happening post acquisition, the acquirer needs to ensure that the risk is allocated equally between the buyer and seller through the indemnification clause documented in the SPA agreement.
The objectives of acquirers vary widely from one deal to another and hence it is important to spend time to understand what matters are important to each party in the M&A process. Though certain success factors will always be critical like – successful transfer of customer and supplier relationships and the retention of key employees within the business they are buying.

Key Challenges facing Technology M&A activity

Geopolitical uncertainty along with the current wave of protectionism which is evident in the increasing restrictions on foreign direct investment, trade wars and in some cases obstacles to outbound investments presents increasing execution risk for cross border M&A. This can result in the de-globalization of the deal making as buyers pursue more local targets in deals that are easier to get closed.
Some deals have witnessed regulatory intervention, hence buyers need to think through the type of concessions and undertakings the parties may have to offer regulators before proceeding forward with the deal.

Key takeaways

Technology will continue to be the disruptive force due to its capacity to reach across sectors. Hence Tech M&A will continue to be at the forefront of global deal making.
As the world is moving towards increasing uncertainty, strategic acquirers and Private equity firms are focusing greater attention on the highest quality assets and are inturn willing to pay a premium valuations for them.